Ninth Circuit Botches Evasion of Assessment Statute of Limitations (2/12/20)

In United States v. Galloway, 2020 U.S. App. LEXIS 3976 (9th Cir. 2020) (unpublished), here, Galloway was convicted of four counts of tax evasion.  On appeal, Galloway made several arguments.  I focus here only on his argument that the statute of limitations foreclosed his convictions on three counts of tax evasion (evasion of assessment).  I think the Court erred.

Here is the panel’s discussion of that issue:

1. Galloway argues that the district court erred in not dismissing Counts 1–3 on statute-of-limitations grounds because the indictment was brought more than six years after Galloway filed his 2003, 2004, and 2005 tax returns. We review the district court’s decision de novo. United States v. Sure Chief, 438 F.3d 920, 922 (9th Cir. 2006). 

The six-year statute of limitations for tax evasion, 26 U.S.C. § 6531(2), begins to run in evasion of assessment cases “from the occurrence of the last act necessary to complete the offense.” n1 United States v. Carlson, 235 F.3d 466, 470 (9th Cir. 2000).n2  Because tax evasion “is not a continuing offense” for statute of [*3] limitations purposes, Cohen v. United States, 297 F.2d 760, 770 (9th Cir. 1962) (quoting Norwitt v. United States, 195 F.2d 127, 133 (9th Cir. 1952)), the offense of tax evasion “is complete as soon as every element in the crime occurs,” see United States v. Musacchio, 968 F.2d 782, 790 (9th Cir. 1991). The elements of tax evasion under § 7201 are: (a) “willfulness”; n3  (b) “the existence of a tax deficiency”; and (c) “an affirmative act constituting an evasion or attempted evasion of the tax.” United States v. Kayser, 488 F.3d 1070, 1073 (9th Cir. 2007).
   n1  Both parties agree that Counts 1–3 charge Galloway with committing tax evasion only by evading the assessment of taxes, and not by evading the payment of taxes.
   n2  The Government’s contention that Counts 1–3 are timely because the statute of limitations began to run, not from the filing of the false tax returns, but from the date Galloway lied to the IRS agents about his taxable income—i.e., the last act of evasion—is squarely foreclosed by Carlson’s clear language. See 235 F.3d at 470.
   n3  The parties do not dispute that Galloway willfully filed his false tax returns.  

  When Galloway late-filed his 2003, 2004, and 2005 tax returns, he had already incurred a tax deficiency for each year. See United States v. Voorhies, 658 F.2d 710, 714 (9th Cir. 1981) (“A tax deficiency exists [by operation of law] from the date a return is due to be filed . . . .”). Therefore, each offense of tax evasion charged in Counts 1–3 was complete when Galloway willfully filed his false tax returns (i.e., each element of tax evasion was thereby satisfied). Because the indictment was brought more than six years after Galloway filed his 2003, 2004, and 2005 tax returns, Counts 1–3 are barred by the statute of limitations. We therefore reverse the district court’s denial of Galloway’s motion to dismiss and vacate his convictions as to Counts 1–3. 

The panel’s reasoning is that the crime of tax evasion (of assessment) was complete upon filing fraudulent returns underreporting the tax liability.  However, my understanding is that the crime of evasion of assessment can be committed by later acts such as lying with the intent to evade assessment of the tax liability.  The lying or other act of evasion of assessment can be a separate act of evasion if it is intended to evade an assessment.  See United States v. Beacon Brass Co., Inc., 344 U.S. 43 (1952), here (holding inter alia (p. 46), with respect to the statute of limitations "We do not believe that Congress intended to require the tax-enforcement authorities to deal differently with false statements than with other methods of tax evasion.")

So, does Carlson foreclose that despite the holding of Beacon Brass?  No.

First, for the obvious reason that Carlson cannot overrule Beacon Brass.

Second, Carlson does hold what the Galloway panel thinks it held.  The Carlson opinion (United States v. Carlson, 235 F. 3d 466 (9th Cir. 2000)) is here.  Carlson was of the tax protestor genre who “concluded that the code simply does not apply to him. His theory, apparently, is that he is not a ‘person’ subject to the code.”  He failed to file tax returns, and that failure continued even after he was audited and assessed tax liabilities. Carlson took steps to hide his bank accounts.  By superseding indictment, Carlson was charged with three counts of evasion of assessment for three years and two counts of evasion of payment for tax assessed for earlier years.  Note that Carlson failed to file returns, so the case was the unusual case where failure to file would have been felony tax evasion (rather than misdemeanor failure to file).

The Court discussed the evasion of assessment argument as follows (emphasis supplied):

a. Evasion of Assessment Charges 

Although Carlson does not claim that the prosecution was not timely, it is helpful to discuss the statute of limitations issue in a straightforward manner before turning to Carlson's more convoluted claim. 

In this case, there is no question that the indictments for evasion of assessment of taxes were filed within the six-year statute of limitations. Carlson's arguments regarding the statute of limitations are based on the faulty premise that the statute of limitations began to run when he committed the affirmative acts of evasion. However, the statute of limitations for evasion of assessment begins to run from the occurrence of the last act necessary to complete the offense, normally, a tax deficiency. See e.g., United States v. Payne, 978 F.2d 1177, 1179 (10th Cir.1992); United States v. DiPetto, 936 F.2d 96, 98 (2d Cir.1991); United States v. Williams, 928 F.2d 145, 149 (5th Cir.1991). A taxpayer normally incurs a deficiency on April 15 of a given year, when tax returns are due. 

Carlson's tax return for the year 1991 became due on April 15, 1992. The return for 1992 was due on April 15, 1993, and the return for 1993 was due on April 15, 1994. Thus, prosecution on each of the three evasion of assessment charges had to be commenced by April 15 of the years 1998, 1999, and 2000, respectively. The United States filed its original indictment which included Counts One, Two, and Three on February 5, 1998. Therefore, as a matter of law, the indictments for evasion of assessment of taxes were filed within the six year statute of limitations. 

In arguing that the affirmative act element of the offense could not be based on conduct occurring outside the statute of limitations, Carlson is effectively attempting to recast the statute of limitations as a rule limiting the introduction of evidence. Our precedent rejects this notion. In United States v. Musacchio, 968 F.2d 782, 790 (9th Cir.1992), we rejected the defendant's contention that his conviction for misapplication of funds could not be based on acts of misrepresentation that had occurred outside the statute of limitations. We stated: "[The defendant] is attempting to convert the statute of limitations from a procedural rule that requires the bringing of a complaint within a certain time after the completion of a crime to a rule that restricts the introduction of evidence. We find no support for this use of the statute of limitations." Id. For the same reason, we will not allow Carlson to transform the statute of limitations from a procedural rule barring the commencement of prosecutions into a rule of evidence.

The Carlson Court finds the evasion of assessment charge was clearly timely because it was within six-years of the date failure to file (the act of evasion) evading the underreported tax liability.  The Carlson Court did not opine or even infer any opinion as to whether a later act of evasion (lying to agents) to avoid assessment could not be charged as tax evasion with a new statute of limitations.

Finally, I offer this from my last edition of my Federal Tax Crimes book (no longer published; footnotes omitted):

Notes on Beacon Brass 

In effect what happened in Beacon Brass was that the taxpayer’s false statements after the return date set a new starting date to calculate the six year statute of limitations for tax evasion.  Normally, the six year statute date for evasion of assessment by false return starts on the date the false return is filed.  However, in the course of the audit, the taxpayer in Beacon Brass made false statements in order to prevent the IRS from discovering the understatement of tax and thus started a new six year period.  In essence, the taxpayer “refreshed” the statute of limitations. 

How far can we take Beacon Brass?  Assume that a taxpayer filed a fraudulent year 01 return in year 02 falsely claiming large net operating losses that not only wiped out his tax liability for 1984 but also carried forward to wipe out tax liabilities in year 08 (the return for which was filed in year 09).  By claiming the false net operating losses on his year 08 return filed after the criminal statute of limitations on year 01 had expired, the taxpayer has committed a separate act of evasion – evading his year 08 taxes. 

What if, however, the taxpayer did not claim the net operating losses on his year 08 return, realizing that he would thereby be committing a felony?  He is just happy that the criminal statute of limitations has expired on year 01.  As noted above, his falsely claimed net operating losses did save him taxes in year 01, so his civil statute of limitations is still open.  During the course of the audit of his year 08 return (on which he did not claim the carryforward losses), the IRS agent asks the taxpayer for retained copies of prior returns.  The taxpayer supplies him the returns for year 01 through year 07.  The agent notices the large year 01 net operating loss and asks the taxpayer about it.  Then, realizing that the agent may focus on the year 01 taxes saved and assert a civil tax liability, along with penalties and interest, for year 01 under the unlimited civil statute, the taxpayer tries to fade the heat by lying.  The taxpayer has then committed felony tax evasion for year 01 even though the criminal statute of limitations for year 01 was not otherwise open.   He has just refreshed an otherwise closed criminal statute of limitations.  He has also committed another felony - false statements under 18 U.S.C. § 1001 which we consider later because that crime is frequently charged in tax cases.

JAT Other  Comments:

1.  Note that one count of tax evasion was affirmed by the Ninth Circuit, so the remand for sentencing will require sentencing on that count of tax evasion which is a five-year felony.  And, with inclusion of relevant conduct from other years, the tax loss on the dismissed three counts may be included in the Sentencing Guidelines calculations, so that the same Sentencing Guidelines calculation will be made as before.  That would mean that, if the prior sentence was 5 years or less, the same sentence will likely be imposed.